Trade: The 25% 'Solution'

In today’s edition of the Financial Times (subscriber access only) — and principally in the context of the US President’s commitment to reviving the coal mining industry in the US — Ed Crooks reflects on what increasingly appears to be a general propensity on the part of Mr Trump to invoke national security-related arguments to justify changes in policy which fly in the face of America’s international commitments. His starting point was Mr Trump’s assertion in West Virginia last week that his Administration is “working now on a military plan” to exploit coal’s “indestructible” nature (relative to wind turbines and pipelines).

In my recent article 'Junck Bond?', I examined the 25 July agreement between the European Commission’s Jean-Claude Juncker and Mr Trump to hold fire on further transatlantic trade measures, concluding that the EU would do well not to take “the mercurial Mr Trump’s word as his bond”. Such advice is hardly non-consensual. But the hope is still out there that Mr Trump might hold back from further measures against America’s nominal allies at least as long as trade tensions with China are escalating (as they did at the end of last week despite fresh talks between senior representatives of the two countries).

I therefore think Mr Crooks was absolutely correct to move on from coal and remind FT readers that the US Department of Commerce is beavering away at its Section 232 (ie the national security provision used to justify steel and aluminium tariffs) investigation into auto imports. And that, even though the investigation appears to be far from concluded, Mr Trump stated baldly in West Virginia that:

“We’re going to put a25% tax on every carthat comes into the United States from the European Union”.

According to Commerce Secretary Wilbur Ross, a delay (relative to the original August deadline) in concluding the investigation is the result of ongoing Nafta-related talks with Mexico in particular and the amount of evidence submitted to his department by auto manufacturers who remain largely opposed to the imposition of tariffs. Nevertheless, in the light of Mr Trump’s comments in West Virginia, this looks much more like a stay of execution than the US’s to back off definitively.

Let’s be clear about two things. First, as I have been arguing consistently ever since Mr Trump won the Republican nomination, he does appear genuinely to believe that, using tariffs, he can bring manufacturing jobs back to the US (as well as redress trade imbalances). Second, objections to auto tariffs from the industry in the US notwithstanding, his preparedness to punish other countries for ‘unfair competition’ is popular with a significant proportion of his base — to the point where Republican legislators at large seem to have turned their back on the party’s longstanding commitment to free trade.

Both these points would apply in almost any circumstances, in my view. But with Mr Trump under increasing pressure from the Mueller investigation and related developments (see my 23 August article), he is even more likely to resort to measures which appeal to his base in order to seize control of the news cycle and shore up his approval ratings, as he did with the original announcement of the steel and aluminium tariffs.

As Mr Crooks concludes:

“Either Congress, or the courts, or clear evidence that the trade wars are really hurting the economy, could force the administration to change course, but there is no reason to think that any of those possibilities will materialise quickly. Like civilians in the second world war being urged to ‘produce for victory’, businesses in the US can expect the patriotic appeals to national security to continue.”

On a footnote, for readers wondering about the title of this piece, I drew on the 1974 pastiche of a Sherlock Holmes adventure by Nicholas Meyer (and 1976 movie), The Seven-Per-Cent Solution (see image), referencing the fictional detective’s cocaine addiction. Latter-day fans will also note that Holmes’s addiction is central to his relationship with Dr Watson in the current TV adaptation, [Elementary](.